Published June 06, 2012
The fallout of JPMorgan Chase’s (JPM) $2 billion trading blunder has raised new questions about the ability of big bank CEOs like Jamie Dimon to sit on the boards of regional Federal Reserve banks, which are supposed to serve as watchdogs of financial institutions.
Dimon, once thought of as the king of Wall Street, has that plum spot at the New York Fed Bank, which acts as the Federal Reserve’s eyes and ears into the financial markets and operates its $2.6 trillion balance sheet.
Yet that assignment means Dimon helps to oversee one of his company’s main regulators, a position that some see as a conflict even though the board doesn’t directly delve into bank supervision.
“It is a conflict of interest to have the regulators also be the regulated,” said Charles Geisst, a finance professor at Manhattan College. “It’s too complicated. You can’t put everyone in the same building and not expect somebody to influence somebody else.”
These concerns come during a time of great skepticism about the Federal Reserve and its relationship with Wall Street as Americans grapple with 8.2% unemployment.
While 75% of investors approved of Fed chief Ben Bernanke’s job in a recent Bloomberg News poll, his approval rating was just 27% among the general public as of March.
“If you agree that the Fed needs to rebuild credibility as a strong and competent central bank and regulator, it may need to rethink some of its longstanding practices to come into the 21st century,” Nicholas Colas, chief market strategist at ConvergEx Group, wrote in a note last week.
Board Structure Eyed
While Dimon is the only CEO of the so-called “Too Big to Fail” financial institutions to have a seat at a regional Fed bank, he’s hardly the first to serve in both roles, following in the footsteps of mentor Sandy Weill, the architect of Citigroup (C).
In fact, the Fed’s complex setup specifically calls for each of the 12 regional banks to have three classes of directors, including one representing the interests of the public and another representing the banking industry in the given region.
Supporters of the current structure point out that bank supervision doesn’t fall under the direct purview of the regional bank directors.
“While all directors are involved in matters regarding Reserve Bank governance and oversight, they play no part in the Fed’s role in supervising and regulating financial institutions,” Esther George, president of the Kansas City Fed, said in a statement last month supporting the right of bankers to serve on the boards.
Ernie Patrikis, who ran the NY Fed for five years until 1998, said board members stick to matters like human resources, operations and management practices.
“In all of my 30 years in the NY Fed, regulatory issues were not discussed. No particular institution was ever discussed unless the institution was a failing institution,” said Patrikis. “I never heard anyone say or think we should give this guy or his organization a break because he was a director.”
CEO Insights Coveted
Patrikis, who is currently a partner at White & Case, doesn’t have a problem with CEOs of big banks sitting on the boards.
“It’s not a conflict because it was set up that way,” said Patrikis. “They give their views about local, regional, national and international economies. So we don’t want anyone to be able to speak to international and national economies because they’re [from] a large bank?”
Still, it seems that Wall Street chieftains could and even do give real-time insight to Fed officials without sitting on the board. Call logs from the financial crisis show Tim Geithner, then the president of the NY Fed, frequently conversed with panicked CEOs like Lloyd Blankfein of Goldman Sachs (GS) and John Mack of Morgan Stanley (MS).
Geisst suggested naming big bank CEOs to an advisory board that had no actual power to avoid this issue.
Could Dimon Leave Fed Board?
The debate about the structure of the regional Fed banks comes in the aftermath of JPMorgan, which had been seen as the safest big bank, disclosing a trading loss of more than $2 billion due to a failed hedging strategy. The surprise announcement has erased almost $30 billion from JPMorgan’s market cap and raised questions about its company’s governance and risk management.
“The Fed is a regulatory body, even if that function doesn’t flow through the board of directors,” said Colas. “For the sake of rebuilding some confidence in the Federal Reserve system, I wouldn’t be surprised to see Mr. Dimon step down of his own accord in the very near future.”
JPMorgan declined a request for comment.
Patrikis said he “hopes” Dimon doesn’t step down because he’s a huge asset to the board. “The question is why didn’t he do a better job managing his company, why didn’t the Fed examiners and the OCC examiners do a better job. That has nothing to do with Jamie Dimon being on the board,” said Patrikis.
Questions are also being raised about the resumes of other current and former regional Fed board members.
For example, Ellen Futter, a former chairman at the NY Fed and current president of the American Museum of Natural History, sits on JPMorgan’s risk committee that presided over the $2 billion loss.
According to Bloomberg, JPMorgan is the only one of the six largest U.S. banks without a former banker, regulator or finance professor on its risk committee.
Patrikis defended Futter, noting her experience as a lawyer on Wall Street. “This is one sharp lady,” he said.
At the same time, Colas noted that Emily Rafferty, who is the president of the Metropolitan Museum of Art, sits on the NY Fed’s audit and operational risk committee, which is chaired by Columbia University President Lee Bollinger.
Bollinger “is a first-class lawyer, according to his bio. But what do he and the head of a very fine museum really know about managing and monitoring a large and complex fixed income book?” said Colas.